Intro hoonigan went bankrupt what does that mean that sounds scary oh my gosh I've seen a lot of information out there that just isn't accurate and I have a unique role I straddle both the automotive world and the private Equity world I am a Formula Drift Prospect driver and I have been a racer most of my life I was involved in the industry since age 14 as a videographer became a driver at age 16 got my Formula Drift license in 2020 and have competed for for 4 years so I have dealt with a lot of different companies in this space including big ones and small ones and everything in between now on the finance side of things I started my career as a consumer investment banker in New York with a firm called Steven zinc and I continued my career by switching to private Equity but I specialize in defense and government services businesses so completely outside of the automotive world with that being said from a structural perspective from a understanding of how Finance works that is pretty much all the same behind every single industry so I want to clarify and clear up a lot of things that are being said because they just aren't true and are not capturing the full perspective all right so let's just start out with explaining what hoonigan actually is it is not just the What is Hoonigan? content piece that you know and love and have seen Grown from Ken Block and Etc so hunigan was actually purchased several Acquisitions into the platform investment from Clear Lake which originally was Wheel Pros that they did that deal back in 2018 so one common private Equity strategy is a rollup strategy it's the idea very simply put is to buy several businesses package them together as one integrate them meaning back office and everything is all in one place and then a big part of the strategy is to Rebrand as a new name and so in this case wheelpros bought throttle it brought a bunch of different things and then hunigan was one of those brands arguably the strongest Brands what did they do they rebranded the entire platform as hunigan so when you're talking about hunigan you have to consider that it's really not just hoonigan there are a bunch of other pieces of the puzzle that make up the hunigan platform all right next let's How does bankruptcy work? talk about what bankruptcy means okay so what bankruptcy means for your purposes I'm just going to talk about two different ones and try to explain them very simply so you have chapter 11 and chapter 7 chapter 11 which is what is going on now means reorganize come up with a plan to eliminate debt and start over basically and continue to operate the business and plenty of companies can come out of chapter 11 and just go go back and be normal basically uh Holly was actually a great example of a company that was once in bankruptcy and then emerged out of it and then sold several times and now it is a publicly traded company so chapter 7 is what you're probably more familiar with when you say bankruptcy which is complete liquidation just fire sale everything has got to go so to clarify hunigan filed chapter 11 which is reorganization and simply put all of the equity holders meaning the owners of the business meaning Clear Lake they got wiped out asses handed to them but also all the rollover Equity from all the businesses they bought if you were an existing owner of a business you sold to wheelpros and you retained a little piece of ownership well guess what that's gone too sucks really sucks but that's the reality all of those Equity owners are now done they own nothing they have no control they are out and so what does that mean that means the people that lent them money and it gets Who owns Hoonigan now? really complicated on purpose to confuse you but let's just simplify the most important lenders the first lean lenders now own the business and of those lenders the largest is a company called strategic value partners and what are they I honestly don't know a lot but from looking at their website for 5 minutes you can tell that they are a distressed investor they specialize in investing in these types of deals because they know they can basically lend this company money at a sizable return rate and then if all else fails they get to take over the business and they are loan to own scary people people to deal with complete sharks and not somebody that you really want to be dealing with but you're Wheel Pros and you kind of got yourself into a bind nobody else you know is willing to lend you money so you turn to the Mob and the mob's going to get you so all right next what actually led to these chapter 11 filings so the funny thing is there is a Why did Hoonigan go bankrupt? 120 page document that tells you exactly what led to the filings it has nothing to do with content that's the best part right business challenges so they had macroeconomic shocks basically a lot of these deals that were done by wheelpros in hunigan in terms of buying things happened during Co now during Co in the automotive industry people had never ever bought stuff like they did during the pandemic nothing else to do I'm just going to keep buying car parts so that sent a huge shock into the system companies were selling out of everything they had but then they were not able to replenish inventory so they ramped up production and they had a lot of supply chain issues like things were way more expensive and all this other stuff so basically earnings shot up artificially because as we know once Co returned back to normal people stopped buying stuff as much as they were during that time and so if you bought a business off peak earnings and then Falls and you were using debt to fund that business that now can't repay its debts because the earnings fell I think you can see the problem here so those were supply pressure issues macroeconomic shocks corporate organization and internal controls so meaning when they bought a bunch of different businesses trying to integrate them it turns out is actually really hard and they didn't have appropriate controls they probably had inventory issues it's not super clear what exactly happened on Shoring challenges so in 2018 and 2020 the company in an effort to increase the speed at which it could bring its products to Market and to reduce Reliance on overseas manufacturing they purchased two facilities in York South Carolina and Auburn Alabama respectively so they purchased these facilities for $12 million and they invested additional Capital to refit and restart these operations and ultimately the company was forced to invest a significant portion of its manufacturing facilities in the York location in 2021 and closed the plant in Auburn entirely in 2023 so you basically made a $112 million plus investment and then it went away and I think part of that had to do with trying to again speed up production try to fill that demand that happened during Co oh crap like that thing went away and now you're stuck with these facilities that just are losing money so all of these things that they just laid How much money did Hoonigan lose? out those four things led to a banner sales year in the company so during the pandemic in 2022 where they achieved $1.5 billion in Revenue but then the revenue fell to approximately $1.34 billion in 20123 so you basically lost almost $200 million in Revenue in one year that's insane and then between the fiscal years 2021 and 2022 the company adjust to debit do oh scary Finance word okay so what does that mean earnings before interest taxes depreciation amortization adjusted so adjusted funny word it means add backs which are Honestly made up so they are expenses the company realized but I can argue we one time only you know extraordinary never going to happen again long story but it whole point of that is it is a proxy for cash flow and it is what you are judged on when you're selling the business or when you're raising debt Capital anyway their adjusted eah dropped by $152 million and in fiscal year 2023 it dropped another $23 million holy crap so you mean you went your profitability declined more than $175 million in 2 years that's awful that is terrible all of this ended up with $1.2 billion worth of debt so if you think about that number you're Is $1.2 billion a lot of debt? probably like oh my gosh that sounds huge but if you have the earnings to support it then it's really not that scary the lenders blend you money based off of ratios right and if you can meet those ratios then they are comfortable with lending you money so I'm going to talk about two of them all right the first one I think is a little bit easier Total leverage ratio to understand and that's just your total leverage ratio so that means your debt divided by your adjusted eitaa and so if your total debt divided by adjusted Eid do equals around 3 to four times that's not so bad so let's look at what hoonigan's current debt ratio is in the bankruptcy filing hunigan has listed out its 202 for expected adjusted EA and it's $11 million okay so they have $1.2 billion worth of debt right and we're just going to use round numbers but uh $1.2 billion divided 111 million equals 10.8 times holy crap that is a lot that is so much they do not have the ability to uh pay back the debt I've typically levered businesses anywhere from 2 and 3/4 times to four maybe 4 and a half now granted I only work with businesses that are in the range of sub $10 million to $20 million of adjust to debah because at that point it just makes more sense to exit the business but um yeah five over five times is very risky and the other leverage ratio to focus on is the debt Debt service coverage ratio service coverage it basically implies can you pay back can you service your debt meaning can you pay the interest can you pay the principal and usually you want that ratio to be one well the banks want the ratio to be over one meaning you 100% can guarantee you can pay your debt kind of makes sense but then Banks actually like to have a little bit of a cushion and some are willing to take less of a cushion some really want a lot it's really dependent upon what negotiations you're doing but I've seen them range from 1.1 at the most aggressive to I don't know 1.25 maybe even 1.3 or 1.5 as the years go on in the loan so anyway those are the two ratios that dictate how much debt is actually a lot because $1.2 billion could be not a lot if the company had a billion dollars worth of earnings that it could use against those ratios that I was just talking about What does Hoonigan's bankruptcy mean for the average consumer? all right so overall what does this mean for the consumer so chapter 11 is not a liquidation it means a reorganization and what is what does that mean it means the balance sheet gets reset so all of that existing 1.2 billion goes away and the lenders have agreed to basically instead of taking their $1.2 billion they are now going to take over control of the business and they are kicking out all of the old Equity owners and what's going to happen next management team may or may not get fired and the business will continue operating and if all else goes well then maybe they'll emerge out of this successfully and if not then maybe we go back to Chapter 7 bankruptcy and liquidation and then game over that's it as a lot of others have already pointed out there's already been a lot of mistakes on the hoonigan side of basically getting rid of the people that made hoonigan hoonigan obviously rip can block but there was a whole management team there and a bunch of content creators that were there that are now gone and I think this is where private Why generalist private equity firms suck Equity fails to realize that they actually bought a people business because these same Geniuses that are used to investing in water valve businesses think that they can apply the same logic to an automotive brand which is an Enthusiast brand which is not a water valve control business and that's why generalists like Clear Lake get their asses handed to them when they try to mess with industries that they don't know anything about I personally am a very specific very focused investor in defense and government services I love that industry from an investing standpoint because there's a very clear value proposition to building good businesses and working with Founders to help them enable them to transform from a small to midsize business so not all private Equity is made equal generalist in this day and age there's no place for them they get their asses handed to them all the time because they try to fit investments in Industries they don't know anything about into a box that they're familiar with and when you do that it's not one box fits all because something that works in the tech world is not going to work in the finance world is not going to work in the water valve control world or whatever that is but that's what Clear Lake invests in and if you're not an industry specialist in this day and age then you don't know what you're doing and you only know how to be a financial engineer Wall Street Banker guy and guess what that era is over that was over so long ago that worked in the 80s maybe even the '90s maybe even the early 2000s but it's 2024 and you're very quickly seeing generalist firms lose their shirt on deals like this where they don't understand how the cause and effect relationships work with management and content creators and overall value proposition so hopefully this was interesting I happy to talk about Finance more because that is the other side of me that you may not see if you only look at my drifting stuff all right well until then have a good one